US Economy

Why the Fed should hike now: Dick Kovacevich

Kovacevich: Inflation may never reach 2%

The Federal Reserve should raise interest rates next week and if it doesn't it will be bad for the economy, former Wells Fargo chairman and CEO Dick Kovacevich said Friday.

"They should do it now. Everything is aligned. The market expects it sometime, so do it sooner than later. It will be expected because it's not a big deal. If you remember all the anxiety and concern about QE3 when it was ended, it was a big yawn and it will be a big yawn this time," he said in an interview with CNBC's "Closing Bell."

What's more, he believes not increasing rates also sends a bad signal.

"If you don't raise rates, you are signaling that you have no confidence in the continued economic growth of our economy. That would be a disaster."

The Fed holds its two-day meeting beginning Wednesday, when it could opt to begin hiking rates. The central bank has indicated in the past that it would like to raise rates this year. However, it has stressed the decision will be based on economic data.

Federal Reserve building, Washington.
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Kovacevich said all of the metrics the Fed said were important to raising rates have been reached, except one.

"Certainly, the unemployment rate is even lower than they said, the economy is still doing well, there is very low risk of recession. The only metric that they haven't reached is the inflation rate," he said.

However, he doesn't believe inflation will reach the Fed's target of 2 percent in the short run and, in fact, he believes if inflation was currently at 2 percent, the U.S. economy would be worse.

That's because low inflation and low income gains have helped consumers gain positive personal income, despite savings accounts that are "worthless" due to low interest rates.

"They're spending it. If we had 2 percent inflation they would not have any discretionary income to spend," he said.

Meanwhile, the rate increase itself, expected to be a quarter point, is "much ado about nothing" and still a "massively accommodating monetary policy," he said.

That said, Kovacevich doesn't think the Fed will raise rates next week because he said it is too cautious.